We Think PETRONAS Chemicals Group Berhad (KLSE:PCHEM) Can Stay On Top Of Its Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that PETRONAS Chemicals Group Berhad (KLSE:PCHEM) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for PETRONAS Chemicals Group Berhad

How Much Debt Does PETRONAS Chemicals Group Berhad Carry?

As you can see below, at the end of September 2024, PETRONAS Chemicals Group Berhad had RM3.04b of debt, up from RM2.86b a year ago. Click the image for more detail. But on the other hand it also has RM8.74b in cash, leading to a RM5.70b net cash position.

How Strong Is PETRONAS Chemicals Group Berhad's Balance Sheet?

We can see from the most recent balance sheet that PETRONAS Chemicals Group Berhad had liabilities of RM10.0b falling due within a year, and liabilities of RM8.43b due beyond that. Offsetting this, it had RM8.74b in cash and RM4.74b in receivables that were due within 12 months. So it has liabilities totalling RM4.99b more than its cash and near-term receivables, combined.

Since publicly traded PETRONAS Chemicals Group Berhad shares are worth a total of RM40.1b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, PETRONAS Chemicals Group Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for PETRONAS Chemicals Group Berhad if management cannot prevent a repeat of the 38% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine PETRONAS Chemicals Group Berhad's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While PETRONAS Chemicals Group Berhad has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, PETRONAS Chemicals Group Berhad actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

Although PETRONAS Chemicals Group Berhad's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of RM5.70b. The cherry on top was that in converted 104% of that EBIT to free cash flow, bringing in RM1.9b. So we are not troubled with PETRONAS Chemicals Group Berhad's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with PETRONAS Chemicals Group Berhad , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.